FORESIGHTS-JUNE,24

In the wake of recent elections, India's political landscape has taken a surprising turn, leaving many pondering the implications for corporate confidence and economic stability. The results revealed a fragmented electorate, with no single party securing a clear majority after a decade of relative political stability. This unexpected outcome has raised concerns about potential instability and its impact on business sentiment.

The election results saw a significant shift in voter preferences, reflecting a widespread desire for change and diversification in political representation. The Narendra Modi-led government found itself facing stiff competition from various regional and opposition parties. The fragmented mandate means that coalition politics will play a pivotal role in forming the next government, introducing a layer of complexity and uncertainty into the political arena.

The absence of a clear majority compels the leading party to negotiate with smaller, regional parties to form a coalition government. These negotiations are likely to involve compromises and concessions, which could influence the new administration's policy direction and governance style. For corporate India, this scenario presents a mixed bag of opportunities and challenges.

Read the full note here:LINK

Sustaining economic growth critical

The GDP data has outpaced market expectations, with a sturdy growth of 8.2% in FY24 as against 7% growth in FY23. It is to be noted that the growth in FY24 is much higher than MOSPI’s second advance estimate of 7.6% released in end February. While overall GDP growth is impressive, it is important to focus on sustainability of growth in FY25.

While the Q4 GDP growth has been strong at 7.8%, there has been upward revision in the previous quarter numbers and that has strongly propped up the overall GDP growth for FY24.

Another important point to note is the sharp net tax collection growth, which has also aided in pushing up the GDP growth for FY24. As far as sectoral performance in concerned, overall agriculture GVA growth has been muted in FY24, given the poor monsoon last year. Supported by lower input prices, manufacturing GVA has shown a healthy recovery, even while services and construction sector growth have remained robust. If we look at the break-up of GDP from the expenditure side, we find that the overall GDP growth is not very broad-based. Private consumption, that contributes around 60% to India’s GDP and is the main pillar of the economy, has grown by a feeble 3.8% in FY24. Investment growth has been healthy, but mainly led by the government sector. Exports, the third pillar of India’s economy, has been muted in FY24 due to weak global growth.

Read the full note here:LINK

I. Corporate Performance – Q4 FY24 Aggregate Analysis

In Q4 FY24, net sales of non-financial firms continued their recovery, increasing by 5.2% YoY from 3.9% YoY in the previous quarter. Despite the improvement in net sales, growth in corporate profitability moderated in the same quarter due to rising expenses. Operating profit growth slowed from 18% YoY in Q3 to 9.7% YoY in Q4, while profit after tax (PAT) growth declined from 24% YoY in Q3 to 15.5% YoY in Q4.

Much of the moderation in profitability can be attributed to rising expenditures, particularly the costs of services and raw materials. Total expenditure increased by 4.5% YoY in Q4, up from 1.7% YoY in Q3. After contracting in H1 FY24, the cost of services and raw materials has been trending upward as the global commodity prices have inched up over the last couple of months in FY24.

Read the full report here:LINK

The demand catalyst(s)

India is transitioning towards a developed market economy, with technology expected to play a pivotal role in this evolution. The digital transformation is accelerating economic growth and leading to substantial data generation. This wave of digitization, driven by the expansion of e-commerce, fintech platforms, online streaming, and gaming services, is anticipated to increase the number of internet users and boost internet penetration (internet users as a % of the population) from approximately 63% in FY23 (refers to the period April 1 to March 31) to 87% by FY29. Adoption of technologies such as 5G, IoT, and Artificial Intelligence are also expected to significantly augment demand for data and in turn Data Center. Collectively, these demand factors are projected to triple data consumption in India.

Data Center set-up is capital intensive with close to 40% cost allocation towards hard costs i.e. land & building (including fit-outs), 40% towards the electrical system and a balance of 20% towards Heating Ventilation and cooling system. India offers low-cost benefits for setting up a Data Center aided by relatively cheaper land and labour costs. The capex cost for setting up a Data Center in the country is roughly 45% lower vis-à-vis the world average. In CareEdge Ratings experience the per MW cost in India for setting up Data Center was close to Rs.40-45 crore and it has witnessed escalation due to incremental land, equipment and other soft cost with new capacities being set up at a cost of Rs.60-70 crore/MW. In CareEdge Ratings opinion the cost of the data centre is also contingent upon provisions for scalability, design and location.

Read the full report here:LINK

Cargo growth led by Coal and Containers volumes

Cargo at Indian ports is dominated by 3Cs. i.e. Crude Oil (termed as Petroleum Oil Lubricants (POL)), Coal and Containers as presented below. These three commodities represent 74%-75% of total cargo throughput handled by ports. Over the past 3 years ended FY24, POL witnessed a moderate CAGR of 4% while coal and container volumes witnessed healthy CAGR of 13% and 9% respectively as presented below in Exhibit A.

Increasing coastal volumes to drive coal cargo throughput offsetting flat imports

Coal throughput witnessed healthy growth from 292 MMT in FY22 to 367 MMT in FY23 representing growth of ~26%. The growth in throughput was supported by increased power generation from thermal plants by 6% to 1059.9 billion units. Against this, the imported coal volume registered a y-o-y growth of 18% to 249 MMT in FY23. However, the volume growth was also driven by increased coastal volumes of coal. Coastal volumes have rose from 80 MMT in FY22 to 118 MMT in FY23 registering strong growth of 47%. During FY24, y-o-y growth in coal throughput was ~9% which mirrored the increase in thermal power generation by 9%. This support the increase in domestic coal production and continued coastal coal volumes on a high base of FY23.

Read the full report here:LINK

GRM of India’s leading public sector refiners to moderate in FY25

In FY23, Indian refiners experienced an extraordinary period characterized by all-time high GRMs. These exceptionally high GRMs were primarily influenced by disruptions in the demand-supply dynamics triggered by the outbreak of the Russia-Ukraine war in February 2022. Geopolitical factors played a significant role, leading to an increased supply of cost-effective Russian crude oil to India. Simultaneously, the cessation of natural gas supply from Russia to Europe resulted in a substantial rise in diesel cracks, further enhancing the GRMs for Indian refiners. The subsequent normalization of diesel cracks and contraction in discount available on Russian crude led to moderation in GRM in FY24 to an average of $10 - $12 / bbl. However, the GRMs of Indian refiners consistently outperformed the benchmark Singapore GRMs, reflecting the evolving dynamics of their business operations.

Going ahead in FY25, CareEdge Ratings expects the GRM of Indian refiners to moderate further in the range of $6-$8/ bbl with contracting discounts and lower product cracks.

Read the full report here:LINK

Under these guidelines, the RBI has increased the provisioning requirement on standard assets. The RBI has proposed categorising projects into design, construction, and implementation phases. During the construction phase of a project, the lender is required to maintain a provision of 5% on all existing and new exposures (funded). This will be implemented in a phased manner with 2% by March 31, 2025, 3.5% by March 31, 2026, and 5% by March 31, 2027, for all existing and new exposures.

During the operational phase, the above provisions can be reduced to 2.5% and further reduced to 1%, once the project has a positive net operating cash flow, sufficient to cover the current repayment obligation to all lenders and total long-term debt of the project with the lenders has declined by at least 20% from the outstanding. Furthermore, the projects where the DCCO is delayed for more than two years for non-infrastructure and three years for infrastructure shall attract an additional provision of 2.5%.

Read the full report here:LINK

SUBSCRIBE NOW IF YOU HAVEN'T